Web site instead of wire services?

[goldfish]

Also, Gold, Numbers don't lie, people do.

Let's say there are two "deparments" in a florist store.

Department of Local Orders (DLO)
Department of Wire Ins (DWI, no pun intended)​

Here's the sales of each deparment in May.

DLO: $10,000 in sales, 100 orders ($100/order)
DWI: $10,000 in sales, 200 orders ($50/order)​

COGS was $3,000 each, so...

DLO: $7,000 in sales-COGS
DWI: $7,000 in sales-COGS​

DWI had to pay WS commissions and fees ($2,700 + $300), so now it comes down to...

DLO: $7,000
DWI: $4,000​

to pay for all other expenses....

Expenses are:

Operating expenses (rent, utilities, etc): $5,000
Salaries: $3,000​

Right, this store made money, $11,000 margin - $8,000 expenses = $3,000!

Let me be clear on this first... If there was no DWI, this store would have lost $1,000. So DWI did indeed contribute to the bottom line of this store. This is obvious even without invoking Contribution Margin for each deparment.

However, I think Contribution Margin analyses should look into deeper than that. Let's start with partitioning expenses. First, easy one, Operating expenses. Let's split into two, so that

DLO "pays" $2,500 for operating expenses
DWI "pays" $2,500 for the same​

Now how much is left in each deparment so far...

DLO: $7,000-$2,500 = $4,500 still left
DWI: $4,000-$2,500 = $1,500 still left​

Let's split the Salaries; each deparment pays $1,500 each. After all that, here's what's left...

DLO: $4,500-$1,500 = $3,000
DWI: $1,500-$1,500 = $0​

So even the dreadful DWI broke even... or did it?

Let's recall that DLO made 100 orders, while DWI took care of 200 orders. Isn't it more reasonable to partition the Salaries into 1:2? In that case, the actual profit "Contribution" would be...

DLO: $4,500-$1,000 = $3,500
DWI: $1,500-$2,000 = - $500​

Right, if we partition the Salary this way, DWI actually lost the money. DWI is break-even in one analysis, while losing money badly in another analysis. I can make DWI even more profitable on paper, if you want... just kidding.

 

[Joe Mioux]

Gold I have absolutely no idea what you are talking about.

This is not Cost Accounting.

Give me sometime to figure out your prior post, while I do that please refer to my latest one as well.

I really don't want to appear rude, but I really don't understand your latests thread.

Sincerely;
Joe

 

[Joe Mioux]

Gold:

I see a couple flaws in you analysis.

Your operating partitioning expense example is flawed. You split it evenly between both departments. Those expenses are fixed. So if you take one department away those costs remain.

So without WS income contributing to the expenses, that $5000 has to go to your local orders. It is not variable it is fixed.

Also, labor is fixed so that $3000 must remain as well.

so now you are operating a $10,000 department with the added burden of DWI's portion of that $8000.

Joe

 

[Joe Mioux]

also, i don't think that any florist has 2/3 of its business coming from WS.

100 order from local vs 200 DWI

 

[goldfish]

Already stated if her hours are cut, she'd leave.

She is a designer, not a marketer.

She is a designer, not a singer.

...and she's not paid to wash floors, fill water tubes, or bleach pails either.

So if she's being paid as a designer, she better be designing & not doing these make work projects she's not trained for!!

Then we differ.

Indeed we have a designer, not a marketer/signer, who is not paid to clean floors, fill water-tubes, and would most likely leave if her hours are cut.

Slow seasons are approaching...

In fact I recently asked her to start spending at least 4-6 hours a week to do heavy marketing; go out, visit businesses, and solialize with our potential customers. To me, that's the most sensible thing to do.

 

[goldfish]

Your operating partitioning expense example is flawed. You split it evenly between both departments. Those expenses are fixed. So if you take one department away those costs remain.

So without WS income contributing to the expenses, that $5000 has to go to your local orders. It is not variable it is fixed.

Of course it is fixed, I know that. I was not presenting a typical contribution margin, which is just the percentage of each sales dollar that remains after the variable costs are taken. Sorry, I wasn't clear.

To see how each hypothetical department (DOL and DWI) is doing, it is convenient to partition those "fixed" expenses. This is not something I invented. It's a fairly common procedure. There is a special term for this procedure, but I no longer remember it. Anyway, jargons aren't important...

The justification for allocating fixed expenses into each deparment is that, to generate sales, these departments must incur some expenses in addition to direct costs (such as COGS), even though these expenses are often part of the "fixed" expenses (e.g., rent). Failure to match each department's sales with its relevant "fixed" expenses could lead to wrong conclusions.

For example, consider two business "departments" in a florist: one in a back room making flower arrangements and the other in front selling, e.g., plants. Rent is shared by these two deparments; but in accounting you could split the rent into two deparments, to see whether each deparment is making enough money to pay at least half the rent.

Look at this way; you, a florist owner, is subleting a half of your floor to a guy selling plants. You charge half the rent. If he can't pay half the rent, this plant deparment obviously isn't doing a good business.

The same goes to the DLO/DWI example. We expect each department to be self-sufficient to pay a part of "fixed" expenses, such as rent and salaries.

Also, labor is fixed so that $3000 must remain as well.

so now you are operating a $10,000 department with the added burden of DWI's portion of that $8000.

That's one way of looking at it. I was just trying to present another way of looking at the same thing.

The advantage of spliting all the expenses, fixed and variables, into each business deparment under consideration is this. It generates a clearer (well, at least to me) picture of which deparment is subsidizing which deparment.

Is DWI paying its share of labor (or rent)? If DWI is using 50% of human resources, it should pay for half the salary. To answer this kind of question, partition of fixed expenses is convenient.

Another point I was trying to make, which I failed to do, is that we can manipulate this partition function to make one department artificially look better than the other.

 

[goldfish]

Another point I was trying to make, which I failed to do, is that we can manipulate this partition function to make one department artificially look better than the other.

Please see the attchment (doc file)

I know I'm quoting myself. I was able to locate an article describing allocation of fixed costs and I wanted to share with readers. It deals with product mix, but you can substitute 'product' with 'deparment', and the point remains the same.

Here's some excerpt...

The more fundamental management question is whether any allocation scheme is worth the effort. What's the purpose? Does allocation help decision making? The basic management purpose should not be to find the "true" operating profit for each product or other sales revenue source. The fundamental question is whether management is making optimal use of the resources and potential provided by the company's fixed operating expenses.

Sometimes a business may allocate fixed expenses to minimize the apparent operating profit on a product. I was hired to be an expert witness for the plaintiff in a patent infringement lawsuit against a well-known corporation.

In any case, no matter which basis and method is used to allocate manufacturing overhead costs, the manager should be aware that all allocation methods are arbitrary-it's just a matter of degree. Some products are favored and others penalized, no matter which allocation method is used. Managers should take manufacturing overhead burden rates with a grain of salt. One product can be made to look less profitable (or even unprofitable) or more profitable merely by changing the method of allocating fixed manufacturing overhead costs.

I was just trying to say that this last sentence can be applied to the analyses of wire services. I should have dug up this article before saying anything and making a fool out of myself.

 

[Joe Mioux]

O.K. Gold here it goes.

From your example; two departments: each generating $10,000 each.

Fixed costs totals are $5000 and $3000 which totals $8000.

Gross Sales total $20,000

Fixed costs total $8000

Net Profit is $12,000


Take away one department GS is $10,000, Fixed Costs remain at $8000, Net Profit is $2000.

Yes, if you allocated fixed expenses equally and departmentally there will be departs that lose money and departments that show a better profit. As I have demonstrated that, if you take away one department it may reduce Net Profit.

Now if one department is not covering its variable costs and no fixed costs of the business, then it does make sense to eliminate that department.

Joe

P.S. It has been 25 years, since I took Cost Accounting in college. I have forgotten much of it, but I do remember this part.

PSS, I also remember that I Aced the class

 

[BOSS]

I can't really predict the coming changes on the WS horizon but image we will be looking at a somewhat different picture this time next year. Safe to say we can count on changes in proprietary tech interfaces, more turf wars, alliances in flux and more fees. The decision about a WS can wait a year.

Oh sure you can Cathy

I think we have a pretty good handle on whats coming down the pike....

 

[twiggy]

ROFL. So true for new (and current) owners.

Twiggy has a big advantage in that she has a year to put her puzzle pieces into place.

Imagine opening a new B&M business with a fully functioning, fully indexed website ready to go. One of my husband's recent students is opening a new shop in Michigan in September. She already has her site up and is working to build an image library now - while she has the time. Her approach is refreshing in that she's covering the important, fundamental business development aspects that are often overlooked by aspiring flower shop owners.

I can't really predict the coming changes on the WS horizon but image we will be looking at a somewhat different picture this time next year. Safe to say we can count on changes in proprietary tech interfaces, more turf wars, alliances in flux and more fees. The decision about a WS can wait a year.

The development of a website - domain name(s) registration, basic content, information articles, image library building, etc... can start now.

I've already have some ideas about my web site...and i've added to them since looking around the web development forum... i'll be the only floral shop in this area with a direct web site (as opposed to the "free" teleflora sites..both the grocery dept. and the shop i'm at have them) many people have found the little shop where i am now very easily...online by the yellow pages or whatever.. and have called us direct. that trend is increasing with more retirees moving here and their children and other family members needing/wanting to find a florist from their desktop..

I have to say, I argree with your student you mentioned. planning now while i have the time.. making your map instead of making it up as you go along. taking the time to design a lovley shop, a website to match, to have policies and procedures ect. in place before i open says to my customers.. "I value you.. you deserve my best efffort"

Twiggy

 

[Griff]

I hear snoring in the back of the class!!

Preston is right. No wonder florists aren't interesting in the numbers.

Joe, you have the art of looking at numbers down cold. However, in your prime example you are showing that the florist with $200,000 in sales is already covering the overhead and by joining a WS, any additonal income does fall to the bottom line. I agree. That means that there are some florists out there that can possibly say that a WS can work for them. However, much of the other examples put forth by both you and Goldfish are what I call "feel good" accounting. If you juggle the numbers around enough, you'll always be able to feel good about the outcome. The problem is the numbers are not real for that specific flower shop. Yes, I understand you are jsut giving examples.

Again, the problem with dealing with incoming WS orders to generate marginal profit gain is a real can of worms. For example, a florist has no control of how many orders they are going to get in a month, let alone and average of 50. The number of actual orders going to any one florist today is controlled by the WS and how much money they owe the WS and the sending florist and who they normally use and even if the receiving florist joined the right WS because the SENDER is determining who is paying them the most money. You can't even control when you get these orders. Getting an incoming order at 2:30 in the afternoon for the far side of town carries a complete different delivery cost than the same order received at 10:00 am. There is just no good way to determine all the REAL costs of belonging to any WS in advance these days and therefore figure out mathematically how many incoming orders your need to break even. you can get a rough idea with how Preston showed us, but there still is so many hidden costs that are attached to any of these WS, that saying that $250 membership is not even close. At the same time if you only reach 50 orders incoming in the major holiday months when you are already operating at 85% capacity, then much of the marginal gain could dissappear from additional labor costs. Much of what you have said is based on NO additonal cost.

As I said, Joe, there is nothing wrong with your numbers. They just don't fit the average florist in today's situations. Most florists are feeling the pinch of a compressed market. More choices for the consumer at less price. This means that florist have less opportunities every day to make sufficient money to meet there "bogey" number. Replacing full value business with discounted business makes your situation worst, not better There are several ways to add marginal profit gain to ones business, but joining any WS wouldn't even be on my list. Remember, most businesses don't make 5 years. Having any new or young business join a WS with todays cost is less than smart business.

I do have a question for anyone that wishes to come out of their slumber at the back of the class. If you were starting a business in anything other than a flower shop, what could you do to generate marginal gain business that is being discussed. Remember, Preston's formula is valid. I honestly feel that we should have had these discussions 4 years ago and we probably wouldn't be having the same question asked over and over again as if someone should join some WS. Come on - wake up. Remember there's a grade on this.

 

[prestonway]

It's the process that matters!

...and that's why I tried to K.I.S.S. with my example! (Not referring to you Griff...I love our debates on numbers)

Let me make this perfectly clear...I am NOT a proponent of incoming wire orders. I was simply playing devil's advocate.

Surprised?

All I was trying to get at is the thought process when making a business decision.

Why do we do what we do...or in other words how do you justify any business decision you make?

Well, some of us with accounting experience crunch the numbers.

Others may rely on the "experts" (often found in chat rooms), who may have excellent design skills but fewer business skills.

Yet others "feel" that their decision is the right one.

Some go the route of "if my competition is doing it, it must be right."

Some even rely on the wire services to do their thinking for them.

Here are some examples from this thread, without using names...

Don't worry about learning cost allocation, just get the business running. WHY?

Building a web-site is the thing to do. WHY?

Capturing local business is 10 times better than incoming wire orders, which will be proven after 5 to 7 years. WHY?

Underutilized designers make good marketers. WHY?

And even using my own example, incoming wire orders may be profitable. WHY?

Earlier on, someone accused me of "only going after the money", to which I replied (quite facetiously), that I'm a florist because "I like playing with flowers". NOT!!!

Let me make myself clear...I am a florist for the money.

It's not a hobby. I am responsible for generating a profit for my family, and my employees. The day I don't make money, I'll utilize my business skills elsewhere. If I wanted a hobby, I'd collect stamps.


...It's a business folks...and then remember that 80% of new businesses fail within the first 3 years.

I wonder what the percentage is for new florists, or for existing florists in this "new economy".

And then wonder why...

 

[12BucksFor2Dozon]

....
Earlier on, someone accused me of "only going after the money", to which I replied (quite facetiously), that I'm a florist because "I like playing with flowers". NOT!!!

Let me make myself clear...I am a florist for the money.

...

Sorry to say, but *my* personal life experiences have shown me that people who do things only "for the money" live sad, lonely, and unfufulling lives. I truly hope this does not apply to you, and if it doesn't I have still have one thing to say to you...

Have you ever thought about what it will be like to be on your deathbed (heaven forbid!), and what will be going through your mind?? It will NOT be how much money you made in 2006, or how often you tricked someone into thinking you were a local florist so you made a "quick buck" off their naive trust. No, it will be memories of the relationships of your family, friends, and things that you did that truly make in difference in peoples lives, like seeing the look on a brides face when you over delivered on her expectations, or when you donated those $100 arrangements for a charity with no strings attached.

So good luck to you, Mr Prestonway, and keep gathering those sales and hard-selling those naive new florists into filling your OTS junk orders so you can continue your worship of the almighty dollar dollar bill.

 

[theRKF]

Mark,

Please remember to make your point without groundless personal attacks or characterizations. We don't need this drama again.

Most contributors to this thread are keeping to the issues and we've had a fantastic debate.

Ryan

 

[CHR]

Prestonway -

I have thoroughly enjoyed your posts and am happy to see so many here jump in to actually discuss accounting. Failing to understand the numbers dooms most florists to failure. There may be members here with "glazed-over eyes" but I hope they take slow tours back through this thread to understand the fundamentals of what is being said.

The only true help on the level of a message board is to encourage each owner to take a hard look at their own shop's specific numbers and apply the principles discussed.

Over the years I've been hired by a number of florists to asses businesses they were considering to open or to purchase. Sad to say most of the existing shop balance sheets and P & Ls were generally messes or approaching fiction. Even when laying out hard numbers - showing start-up break-even points for some at annual sales above $400K - some emotionally charged new owners will ignore the warnings - and blow through a ton of cash.

This is no hobby for me or my family and I take the numbers seriously. I'm in this business to make money, too.

 

[BOSS]

This is no hobby for me or my family and I take the numbers seriously. I'm in this business to make money, too.

I'll second that...although I do it for the fun, relaxation and peace of mind too...

Oh and did I mention I can see retirement on the horizon 5-6 years out!

Right now, it IS about the money, and doing something that gives back, once there's enuf money, then we'll switch to giving back 100%

 

[Bigted]

My two cents

This is no hobby for me or my family and I take the numbers seriously. I'm in this business to make money, too.

In my whopping two years in this industry, I have found the business to be rewarding, and yes, fun. But that doesn't lessen the point that the owner's role is to run a profitable business. Your family, your future and your employees depend on it. Everything else comes in a distant second.

 

[Joe Mioux]

Replacing full value business with discounted business makes your situation worst, not better There are several ways to add marginal profit gain to ones business, but joining any WS wouldn't even be on my list.

I do have a question for anyone that wishes to come out of their slumber at the back of the class. If you were starting a business in anything other than a flower shop, what could you do to generate marginal gain business that is being discussed. Remember, Preston's formula is valid. I honestly feel that we should have had these discussions 4 years ago and we probably wouldn't be having the same question asked over and over again as if someone should join some WS. Come on - wake up. Remember there's a grade on this.

Griff, First and foremost. I am not an advocate for WS membership. I was just using a formula that could be used to set up pararmeters where additional (albeit discounted) WS business might help or hurt a business.

Let me repeat, I am not advocating one way or another. I was using an accounting procedure to make a business decision.

I am not interested in feelings or emotional issues.

Now, here is where our discussion has become derailed.

Your sentence that starts off "Replacing full value business with discounted business......

We are not doing that. The business is being generated in another city and a traditional florist is sending me the order. My full value business is my local clientele and my discounted business is business that I never would have received had I not been in a WS and accepted that order from a Real Flower shop.

I receive very few dot com orders, most probably close to 85 pct is from Real Flower shops. Also less than 10 pct of my business is WS oriented, so again for me it's not as large of a concern for me as it is for others.

Even though I haven't been sleeping, I would love to answer your question

Taking on additional business at a discount is an easy answer.

Anything in manufacturing. Example: A cabinet shop, that may occassionally have excess capacity takes on a small job building decorative fences for a lumber yard. Lumber yard says I will pay you 80 pct of retail if you produce 1000 posts for me.

Welding and manufacturing business same scenrio

Construction company goes through a seasonal lull, they take their carpenters and turn them into kitchen cabinet makers for a month or two, and sell those cabinets at a discounted price to a retailer.

Boat seat manufacturer discounts his product to BASS Pro Shops, when BASS Pro offers to buy 50,000 seats.

Those are just some.....

Joe

 

[Griff]

When I started in this business 20 years ago I had absolutely no knowledge of how a flower shop worked. I had a relative small amount of cash and savings and lsitened to what other florists suggested that I do to get started. You know who is the worst at giving advise for future florists? - other florists. We can't expect younger florists to really keep track of their numbers because the vast number of new florists come from craft oriented interests. That's why florists would rather go to a design show rather than listen to anything that pertains to numbers. It really is a problem for the industry, not just individual florists. It is another reason that so many smaller florists hang on to their WS because, the WS has become THEIR BUSINESS CONSULTANT! Again, in my opinion and based on the direction of the industry, that is like asking all foxes to watch YOUR chickens.

The good new is that there are so many different alternatives for florists today as versus 20 years ago. You have many more solutions to your problems. I couldn't imagine trying to find ways to send orders to other florists 20 years ago and now think nothing of it. Couldn't think of finding alternative CC processors other than the WS. Couldn't even think of ways to communicate with other florists in other parts of the country to compare business notes and now look at what we are doing. The ONE thing that hasn't seemed to change is florists asking other florists. "what do you think about....?" It shouldn't matter what I think about something or what Preston or BOSS or Cathy or anyone else on these boards thinks. If YOU as a business person can't look into a subject with enough depth of thought which includes NUMBERS and make a decision on your own, then most should not be in business today. We have already made our mistakes, and in my case, are still making them and it is a d*** miracle that I'm still in business. So don't ask any of us for our opinion if you should drop a WS or add a WS do I need a website. If you don't know how to calculate the numbers, then it is alright to ask what factors should apply, BUT YOU DO THE MATH!

Now, has anyone thought of other ways to create marginal gain income without joining a WS???

 

[goldfish]

Here's my thoughts in summary

First of all, just to clarify... Unlike financial reports published by public corporations, Cost Accounting is not restrained by GAAP. Cost Accounting is usually kept private and is just a tool for business managers to make business decisions. There are many, many different methods to do Cost Accounting.

One of my friends uses, in his Cost Accounting, an entry called "aggravation." He enteres every dollar he spent on beers into this category, because he believes it's part of the business "cost" caused by difficult customers. You can do that if you want in your private analysis.

In any case, every financial calculation, and various "conclusions" derived from it (note the double quote), is always based on certain assumptions. Some of these assmptions are what accountantns would call "fair" while others may be totally out of blue. Again, you are not regulated by GAAP, so it's all up to you.

The essence of Cost Accounting all boils down to how we allocate "costs" for each of so-called "cost object", which could be products (flower arrangements, plants, etc), or services (delivery, wire-out, etc), or persons (desinger1, desinger2), or for this discussion, internal business categories (or "deparments" such as Local Order, Wire-Ins, etc).

What Prestonway has done in his Cost Accounting is essentially this. He allocated all the fixed expenses (operating expenses and payroll) into just one "department", i.e., the core business that deals with local customers. This kind of allocation is often called "tacking." You stick these expenses into one cost object and forget about the costs for others.

The idea is that all those fixed expenses (rent, salaries, etc) are already "paid for" by this core deparment; in other words, they are there no matter what. it then follows that addition of any other business revenue does not icncur any extra expenses. Therefore joining a WS will be a sound business decision.

Here, in this "tacking" accounting emthod, it is assumed to be valid that one can tack all the fixed expenses into one core department. Note that, this is a concept, not the reality. If your store start filling in incoming orders, this Wire-In department will of course be using the common resources and therefore actually deserves *some* share of the fixed costs. In other words, whenever we allocate costs to something, the basis is sometimes conceptual, rather than realistic. There's nothing wrong with that, as long as the person who is using this method is aware of it.

To reiterate, it is important to know exactly what assumptions our calculations are based on, and each of us should be aware of the limitations of any conclusions derived from our calculations.

Once we realize that every financial calculation, no matter how fancy it sounds, has limitations imposed by the inherent assumptions, we may be able to become a little more cautious, and perhaps a little more humble, whenever we make business decisions based on the calculations. we should not be over-confident about the results of our calculations.

Thus I said "numbers lie." I didn't mean that numbers are fraudulent. They are not (well, usually not). It is just that, when numbers are presented, people usually do not qualify these numbers by saying "our financial analysis assumes that.... and we actually don't know whether these assumptions are valid." But they should.

I rest my case.

P.S. It has been 25 years, since I took Cost Accounting in college. I have forgotten much of it, but I do remember this part.

PSS, I also remember that I Aced the class

I'm jealous. We don't have an under-water accounting school yet, so I never learned anything. Half the time, I don't even know what I'm talking about... :dunno: